When VIP scores over SIP

The age-old wisdom of ‘buying low and selling high’ still makes money in the stock market, however, many of us, especially retail investors, fail to follow that. However, there is a concept called Value Averaging Investment Plan (VIP) that utilises the same concept to enable you to make money. 
 

What is VIP 

Investment in VIP is very much like SIP where you invest every month in a chosen mutual fund at equal interval, however, the amount invested keeps on changing in VIP according to the market performance. Under VIP you set a target value of your portfolio that you want to achieve at the end of a period. Now you work backward to achieve that target investment value every month. 
 

Example 

If as an investor you want to buy a car 12 month from now, that is valued at Rs. 6,00,000. Working backward, you need to save and invest at least Rs. 50,000 every month for a year to your mutual fund portfolio (for simplicity we are assuming no returns). First month you invested Rs. 50,000. In the second month your fund performed better and now your fund value increased to Rs. 51,000. Now in the second month, you need to invest only Rs. 49,000 as this will add up to Rs. 1,00,000. In the third month, however, market nosedived and his investment value declined to Rs. 98,000. Now to make up his portfolio value to Rs. 1,50,000, you need to invest Rs. 52,000.

 
The above example clearly shows that when the market is high, VIP makes us to invest less, while it forces us to invest more when the market is low, helping us to follow the classical strategy of buy low and sell high. One drawback of this strategy is you do not know beforehand what is the amount you need to invest every month. Hence, you need to have the extra liquidity to cover up any shortfall. Another disadvantage of VIP is that you may not invest during the bull run. 

Nonetheless, VIP is mostly used by investors to achieve a target value for some specific purpose, like buying a car in the above example. In these cases where you know your desired portfolio, you can use VIP instead of SIP.

There are various fund houses offering VIP under different names with different options. For example, Edelweiss MF offers prepaid SIP which allows investors to invest a pre-determined lump sum amount when the market falls by 0.5%, 1% or 2%.